Recession on way out, says CBI

THE worst manufacturing recession for a decade was declared officially on the way out today, but the recovery remains fragile with almost three quarters of factories now working at below capacity.

The CBI said its closely watched quarterly industrial trends survey showed business confidence had risen for the first time in two years. But the employers' body warned that orders, output and employment continued to fall over the past four months and said the latest survey might not have been so positive if respondents had known what was in the Budget.

'We cannot be sure that recorded optimism would have bounced back in this way had manufacturers known what was in store,' said CBI chief economist Ian McCafferty.

Industrialists expect exports and domestic orders to grow over the next four months, the first time they have expressed such confidence in more than two years. 'The deepest manufacturing recession for over a decade appears to be on the turn,' said McCafferty. 'Expectations of small rises in orders and output have led to manufacturers becoming increasingly more optimistic.'

Strikingly, the CBI, pointed out, firms working at below capacity increased from 66% to 73% - a level of idleness not seen for eight years. It called for a continuation of the freeze on interest rates.

Meanwhile, Bank of England Deputy Governor Mervyn King said rate moves would be mostly guided by shifts in the exchange rate, oil prices and wages. Such a matrix of factors made it 'extremely difficult' to predict the cost of borrowing. He added that the low inflationary environment meant Britain's consumer spending boom would probably ease down gradually in the coming months, rather than land with a bump.

Treasury macro economic policy head Gus O'Donnell today agreed that consumer spending would decline in the coming months. He defended the upbeat Budget forecasts for economic growth, claiming City economists would soon come round to the Treasury's predictions.

The Treasury forecast of 3% to 3.5% in 2003 was way above most independent forecasts. But O'Donnell told the Treasury Select Committee of MPs that all previous GDP forecasts from his department had proved more accurate than the consensus.

In the US, the Federal Reserve chairman Alan Greenspan said there were signs of a revival in corporate bosses' investment in their businesses, but dampened expectations of rising interest rates. 'It's doubtful the recovery is going to be rapid,' he said.

That left economists more confident interest rates in the world's biggest economy would be frozen for some time. Standard Chartered's Julian Jessop said: 'Greenspan doesn't want to talk down the economic recovery but also doesn't want to fuel fears of interest rates rising quickly - he has to steer this balanced view.'